Unit-1

Definition
“International business consists of transactions that are devised and carried out across national
borders to satisfy the objectives of the individuals, companies and organisations. These transactions
take on various forms which are often interrelated.” – Michael R. Czinkota

Importance of international business

Market Expansion
International businesses are opened to perform business in different countries across the globe. These business
keeps on expanding its activities and explore new markets for selling more and more products. The
international business earns high amount of profits which helps them in expanding their market share.

Brings Foreign Exchange

The international business earns large amount of foreign exchange by selling its products among different
countries. All payments are received in terms of foreign currency which are used by its home country for
payment of imports. The foreign exchange earned by these businesses helps in the overall economic
development of the country.

Spreading Of Business Risks

Presence of international businesses around the globe helps in spreading its risk. In case, if there is a loss
incurred by this business in any one of the countries then that can be easily adjusted with the profit earned in
other countries. International business transferred their surplus goods or resources in one country to another
country which helps them in reducing their risk.

Economies Of Scale
These business are able to enjoy economies of scale due to their large scale production. International
businesses produce large amount of goods for selling in different countries. With the increase in amount of
production, per unit cost of producing goods goes down which helps them in earning large profits.

Cost Advantage
International business takes cost advantage over its competitors by producing goods in one country and
exporting them in another country. They carry on their production in a country where factors of production are
easily and cheaply available. This helps in minimizing the cost of product and earn huge profits by selling
them at better prices in other countries. 

Improves International Relations

International business helps in strengthening the economic relations among nations. These business helps other
nations by exporting them goods of their requirements. It helps in developing better mutual understanding
among countries due to which they are ready to support each other in time of needs.

Provide Employment Opportunities

International business employs large number of people for carrying out its operations across the globe. They
perform large scale operations in many countries for which they require large amount of human resource. 

Government Support
These businesses also enjoy government support for carrying out their operations and expanding their size. The
government provides tax and financial benefits to these businesses as they earn a large amount of foreign
reserves for the country.

Free trade vs Protection

I. Free Trade:

International trade that takes place without barriers such as tariff, quotas and foreign exchange controls is
called free trade. Thus, under free trade, goods and services flow between countries freely. In other
words, free trade implies absence of governmental intervention on international exchange among different
countries of the world.

There are many arguments for free trade:

1. Arguments for Free Trade:

(i) Advantages of specialisation:

Firstly, free trade secures all the advantages of international division of labour. Each country will
specialise in the production of those goods in which it has a comparative advantage over its trading
partners. This will lead to the optimum and efficient utilisation of resources and, hence, economy in
production.

(ii) All-round prosperity:

Secondly, because of unrestricted trade, global output increases since specialisation, efficiency, etc. make
production large scale. Free trade enables countries to obtain goods at a cheaper price. This leads to a rise
in the standard of living of people of the world. Thus, free trade leads to higher production, higher
consumption and higher all-round international prosperity.

(iii) Competitive spirit prevails:

Thirdly, free trade keeps the spirit of competition of the economy. As there exists the possibility of
intense foreign competition under free trade, domestic producers do not want to lose their grounds.
Competition enhances efficiency. Moreover, it tends to prevent domestic monopolies and free the
consumers from exploitation.

(iv) Accessibility of domestically unavailable goods and raw materials:

Fourthly, free trade enables each country to get commodities which it cannot produce at all or can only
produce inefficiently. Commodities and raw materials unavailable domestically can be procured through
free movement even at a low price.

(v) Greater international cooperation:

Fifthly, free trade safeguards against discrimination. Under free trade, there is no scope for cornering raw
materials or commodities by any country. Free trade can, thus, promote international peace and stability
through economic and political cooperation.

(vi) Free from interference:

Finally, free trade is free from bureaucratic interferences. Bureaucracy and corruption are very much as-
sociated with unrestricted trade.

In brief, restricted trade prevents a nation from reaping the benefits of specialisation, forces it to adopt
less efficient production techniques and forces consumers to pay higher prices for the products of
protected industries.

2. Arguments against Free Trade:

Despite these virtues, several people justify trade restrictions.

Following arguments are often cited against free trade:

(i) Advantageous not for LDCs:

Firstly, free trade may be advantageous to advanced countries and not to backward economies. Free trade
has brought enough misery to the poor, less developed countries, if past experience is any guide. India
was a classic example of colonial dependence of UK’s imperialistic power prior to 1947. Free trade
principles have brought colonial imperialism in its wake.

(ii) Destruction of home industries/products:

Secondly, it may ruin domestic industries. Because of free trade, imported goods become available at a
cheaper price. Thus, an unfair and cut-throat competition develops between domestic and foreign
industries. In the process, domestic industries are wiped out. Indian handicrafts industries suffered
tremendously during the British regime.

(iii) Inefficient industries remain perpetually inefficient:

Thirdly, free trade cannot bring all-round development of industries. Comparative cost principle states
that a country specialises in the production of a few commodities. On the other hand, inefficient industries
remain neglected. Thus, under free trade, an all-round development is ruled out.

(iv) Danger of overdependence:

Fourthly, free trade brings in the danger of dependence. A country may face economic depression if its
international trading partner suffers from it. The Great Depression that sparked off in 1929-30 in the US
economy swept all over the world and all countries suffered badly even if their economies were not
caught in the grip of depression. Such overdependence following free trade becomes also catastrophic
during war.

(v) Penetration of harmful foreign commodities:

Finally, a country may have to change its consumption habits. Because of free trade, even harmful
commodities (like drugs, etc.) enter the domestic market. To prevent such, restrictions on trade are
required to be imposed.

In view of all these arguments against free trade, governments of less developed coun tries in the post-
Second World War period were encouraged to resort to some kind of trade restrictions to safeguard
national interest.

II. Protection:
By protection we mean restricted trade. Foreign trade of a country may be free or restricted. Free trade
eliminates tariff while protective trade imposes tariff or duty. When tariffs, duties and quotas are imposed
to restrict the inflow of imports then we have protected trade. This means that government intervenes in
trading activities.

Thus, protection is the anti-thesis of free trade or unrestricted trade. Government imposes tariffs on ad
valorem basis or imposes quota on the volume of goods to be imported. Sometimes, export taxes and
subsidies are given to domestic goods to protect them from foreign competition. These are the various
forms of protection used by modern governments to restrict trade.
Now an important question arises what forces the government to protect trade? What are the chief
arguments for protection? Can protection deliver all the goods that a nation needs?

Arguments for Protection:

The concept of protection is not a post-Second World War development. Its origin can be traced to the
days of mercantilism (i.e., 16th century). Since then various arguments have been made in favour of
protection.

The case for protection for the developing countries received a strong support from Argentine economist
R. D. Prebisch and Hans Singer in the 1950s.

All these arguments can be summed up under three heads:

(i) Economic arguments; and

(ii) Non-economic arguments.

(i) Economic Arguments:

(a) Infant industry argument:

Perhaps the oldest as well as the cogent argument for protection is the infant industry argument. When the
industry is first established its costs will be higher. It is too immature to reap econo mies of scale at its
infancy. Workers are not only inexperienced but also less efficient. If this infant industry is allowed to
grow independently, surely it will be unable to compete effectively with the already established industries
of other countries.

Thus, an infant industry needs protection of a temporary nature and over time will experience some sort
of ‘learning effect’. Given time to develop an industry, it is quite likely that in the near future it will be
able to develop a comparative advantage, withstand foreign competition and survive without protection.

It is something like the dictum: Nurse the baby, protect the child, and free the adult. Once an embryonic
industry gets matured it can withstand competition. Competition improves efficiency. Once efficiency is
attained, protection may be withdrawn. Thus, an underdeveloped country attempting to have rapid
industrialisation needs protection of certain industries.

However, in actual practice, the infant industry argument, even in LDCs, loses some strength. Some
economists suggest production subsidy rather than protection of certain infant industries. Protection, once
granted to an industry, continues for a long time. On the other hand, subsidy is a temporary measure since
continuance of it in the next year requires approval of the legislature.

Above all, expenditure on subsidy is subject to financial audit. Thus, protection is something like a “gift”.
Secondly, protection saps the self-sufficiency outlook of the protected industries. Once protection is
granted, it becomes difficult to withdraw it even after attaining maturity. That means infant industries,
even after maturity, get ‘old age pension’.

In other words, infant industries become too much dependent on tariffs and other countries. Thirdly, it is
difficult to identify potential comparative advantage industries. A time period of 5 to 10 years may be
required by an industry to achieve maturity or self-sufficiency. Under the circumstances, infant industry
argument loses force.

In view of these criticisms, it is said by experts that the argument “boils down to a case for the removal of
obstacles to the growth of the infants. It does not demonstrate that a tariff is the most efficient means of
attaining the objective.”

These counter-arguments, however, do not deter us to support the growth of infant industries in less
developed countries by means of tariff, rather than subsidies.

(b) Diversification argument:

As free trade increases specialisation, so protected trade brings in diversified industrial structure. By
setting up newer and variety of industries through protective means, a country mini mises the risk in
production. Comparative advantage principle dictates narrow specialisation in production.

This sort of specialisation is not only undesirable from the viewpoint of economic development, but also a
risky proposition. Efficiency in production in some products by some countries (e.g., coffee of Brazil,
milk product of New Zealand, oil of Middle East countries) results in overdependence on these products.

If war breaks out, or if political relations between countries change, or if recessionary demand condition
for the product grows up abroad, the economies of these industries will be greatly injured. Above all, this
sort of unbalanced industrial growth goes against the spirit of national self-sufficiency. Protection is the
answer to this problem. A government encourages diverse industries to develop through protective means.

However, a counter-argument runs. Politics, rather than economics, may be the criterion for the selection
of industries to be protected in order to produce diversification at a reasonable cost. But, one must not
ignore economics of protection.

(c) Employment argument:

Protection can raise the level of employment. Tariffs may reduce import and, in the process, import-com-
peting industries flourish. In addition, import- substituting industries—the substitution of domestic
production for imports of manufactures—develop. The strategy of import-substituting industrialisation
promotes domestic industry at the expense of foreign industries.

Thus, employment potential under protective regime is quite favourable. In brief, tariff stimulates
investment in import-competing and import substitution industries. Such investment produces favourable
employment multiplier.

But cut in imports following import substituting industrialisation strategy may ultimately cause our
exports to decline.
(d) Balance of payments argument:

A deficit in the balance of payments can be cured by curtailing imports. However, imports will decline
following a rise in tariff rate provided other trading partners do not retaliate by im posing tariff on a
country’s export. However, import restrictions through tariff may be uncalled for if the balance of
payments crisis becomes serious and chronic. In view of this and other associated problems of tariff, it is
said that tariff is a second best policy.

(e) Anti-dumping argument:

Usually, we hear about unfair competition from firms of low-cost countries. One particular form of un fair
competition is dumping which is outlawed by international trade pacts, such as WTO. Dumping is a form
of price discrimination that occurs in trade. Dumping occurs when a country sells a product abroad at a
low price because of competition and at a high price in the home market because of monopoly power.

In other words, dumping is a kind of subsidy given to export goods. This unfair practice can be prevented
by imposing tariff. Otherwise, workers and firms competing with the dumped products will be hit hard.

(f) Strategic trade advantage argument:

It is argued that tariffs and other import restrictions create a strategic advantage in producing some new
products having potential for generating some net profit. There are some large firms who prevent entry of
new firms because of the economies of large scale production. Thus, these large firms reap pure profits
over the long run during which new firms may not dare enough to compete with these established large
firms. Thus, the large scale economies themselves prevent entry of new firms.

But as far as new products are concerned, a new firm may develop and market these products and reap
substantial profit. Ultimately, successful new firms producing new products become one of the few
established firms in the industry. New firms showing potential for the future must be protected. “If
protection in the domestic market can increase the chance that one of the protected domestic firms will
become one of the established firms in the international market, the protection may pay off.”

(iii) Non-Economic Arguments:

(a) National defense argument:

There are some industries which may be inefficient by birth or high cost due to many reasons and must be
protected. This logic may apply to the production of national defence goods or necessary food items.
Whatever the cost may be, there is no question of compromise for the defence industry since ‘defence is
more important than opulence’. Dependence on foreign countries regarding supply of basic food items as
well as defence products is absolutely unwise.

However, objections against this argument may be cited here. It is difficult to identify a particular item as
a defence industry item because we have seen that many industries— from garlic to clothespin—applied
for protection on defence grounds. Candlestick-maker (for emergency lighting) and toothpick-maker (to
have good dental hygiene for the troops) demanded protection at different times at different places. A
nation which builds up its military strength through tariff protection does not sound convincing. Thus,
tariff is a second-best solution.
(b) Miscellaneous arguments against protection:

There are some good ‘side effects’ or ‘spillover effects’ of protection. This means that it produces some
undesirable effects on the economy and the basic objective of protection can be attained rather in a
costless manner by other direct means other than protection. That is, protection is never more than a
second-best solution.

Firstly, protection distorts the comparative advantage in production. This means that specialisation in
production may be lost if a country imposes tariff. All these lead to squeezing of trade. Secondly, it im -
poses a cost on the society since consumers buy goods at a high price. Thirdly, often weak declining
industries having no potential future stay on the economy under the protective umbrella. Fourthly,
international tension often escalates, particularly when tariff war begins.

Usually, a foreign country retaliates by imposing tariff on its imports from the tariff-imposing country.
Once the retaliatory attitude (i.e., ‘beggar-my-neighbour policy’) develops, benefits from protection will
be lost. Finally, protection encourages bureaucracy. Increase in trade restrictions means expansion of
governmental activity and, hence, rise in administrative cost. Bureaucracy ultimately leads to corruption

Emerging Trends in International Business

Environment
Since the International Business Environment is extremely competitive, it
becomes utmost essential to update oneself with the current trends to survive
in the market. Consider dealing in one of these emerging domains:

Crowd Funding
One major trend that seems to have a bright future in international business is
Crowd funding. It is the best way to finance new business ventures by
collecting a small sum of capital from a large group of individuals. 

It employs a vast network of people via social media and creates Crowd
funding websites to form a direct link between the investor and the
entrepreneur.  Currently, there are several online portals available which are
providing the service of project funding.

Remote Employment
Another prevailing global trend in international business is the remote
workforce. The progressive modes of communication like webinars, video
calls have increased connectivity that facilitates companies to hire employees
remotely.  

This mode of employment is much faster than the traditional hiring methods
and helps employers to hire resources from any part of the world. It is greatly
beneficial for startups because they get a wider pool of talent to choose from
without needing to pay tax returns. Remote employment builds a win-win
situation for both the employer and the employee as the employees get online
jobs on their convenience and employers have access to an efficient
workforce.

Advertise via Live Video 

Social media platforms like Instagram have added a new feature called live
video stream, which created a lot of buzz among people as it is very
engaging. Companies can use the feature of live video for advertising their
services and providing real-time experience to the users. Moreover, one can
also do a Q/A session through live video streaming, which raises the
participation of viewers and helps Entrepreneurs to strengthen their bond
with their client base.

Augmented Reality Marketing

The world embraces the experience of augmented reality, which was
perceived with the success of a video game called Pokemon Go in the year
2016. It opens more doors for implementing creative approaches to
marketing. The users crave for such type of immersive techniques so its
companies should gear up their marketing methods by using current
technologies.

These were some trends that will massively impact International Business
Environment in 2019. An understanding of these macro-level trends will
improve your company’s functionality.

Trade Strategies & their significance

Developing an international trade strategy can be a significant undertaking for a
business of any size. Developing one for a small business, therefore, poses several
unique challenges. The core of any global strategy for trade has to focus on seven
key concepts:
Strong Offerings
Any successful plan for international trade has to start with a high-quality, unique
product. Copying what is already available on the market will prevent newcomers
from carving out space, as existing players and domestic manufacturers overseas
have the advantage of being incumbents. The right product makes a massive
difference when it comes to trade opportunities abroad.
Market Opportunity
Building a global strategy means conducting extensive market research. Small
businesses should be ready to do their homework: this means deeply diving into
the nuances of the market opportunity under consideration, sizing up international
and domestic competitors, assessing product demand, and developing the unique
business proposition that makes it worthwhile to build an international operation.
Supply Chain Logistics
Supply chain considerations, such as management and logistics, take on increased
importance when entering into global trade. Whether you’re exporting goods
directly from Canada or instructing overseas manufacturers to deliver goods to new
geographic locales, you’ll have to build a robust supply chain with as few
weaknesses as possible. Ensure that your current partners can support steady
shipments to international clients and outposts. Failure to do so may create
significant issues when filing early orders as your business begins to gain traction
in its new location.
International Law Compliance
Legal considerations for international trade may involve three different sets of
rules and regulations: domestic laws in a country’s home base, laws in the country
where you’re looking to set up shop and international laws that govern global
trade. Compliance with all three of these sets of standards requires steadfast
adherence to guidelines as well as the dedication to keep up with frequent changes.
Bringing in a strong legal team that understands the ins and outs of compliance is
paramount. Consider hiring local assistance in the country you plan to export to as
well, as they will be in the best position to provide advice on changes as they
happen.
Strategic Partnerships
Finding local partners to help with last-mile logistics and sales is also key.
Whether you plan to establish offices in other countries or simply want to expand
where you do business, having a network of trustworthy contacts and partners can
make an otherwise difficult process slightly less challenging. Good local partners
can help guide businesses through the quirks and challenges that come with
operating in a brand-new location.
Local Resources
While building connections with local entities, be sure not to overlook local
resources that can help you with your international ambitions. CanExport is an
outstanding resource for small- and medium-sized businesses looking to get
guidance (and even financial help) for getting their international operations up and
running. The Canadian government also offers other helpful tips and tools
designed specifically for businesses looking to enter new markets, which can also
be a great resource.
Any international trade strategy is only as strong as the team behind it. Your
company’s staff needs clear, actionable guidance in order to successfully bring
your business to new markets. Hiring the right talent—ideally candidates with
experience in exports—and fostering internal growth can make an ambitious,
potentially capital-intensive initiative easier to roll out.